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Nothing ventured nothing gained

With barely £50m scraped between them this year, venture capital trusts are struggling to overcome poor market conditions and huge falls in investors&#39 capital gains tax liability.

Coming after the record 2000/01 tax year in which they pulled in around £430m, VCTs have hit a brick wall, suffering from the sustained market falls which have left a much smaller number of investors needing to roll over their CGT liability.

But while there is little doubt that the stockmarket has played the biggest part in the shrinking of the market – with only two new offerings launched this year – IFAs believe there are additional reasons for the current slump in demand.

Some, for instance, believe that VCTs have to some extent shot themselves in the foot by persisting with marketing campaigns which have left them with nowhere to go once the tax advantage angle is rendered irrelevant by the stockmarket.

Hargreaves Lansdown investment manager Ben Yearsley says: “In the past, VCTs have been marketed on tax breaks and have totally ignored the investment case. Whenever returns have been mentioned, they are always quoted after all tax relief has been taken into account, giving a false impression of performance. What people want to see is the performance of the manager, not some jiggery-pokery.”

Yearsley believes fund managers have begun to catch on to the fact that they need to promote their products on some other basis than tax breaks and have accepted that the CGT liability many investors faced due to the technology boom has gone.

The realisation led last year to a number of fund managers changing tack, making a far bigger play of their VCTs&#39 investment capability and process – something that Yearsley believes will become the norm over the next few years.

However, for some observers, changing the way in which VCTs are presented to investors is simply skimming the surface of a problem that runs far deeper.

Bates Investment believes VCTs are too elitist to ever achieve mainstream popularity and need to find a way to appeal to a wider audience.

Senior investment adviser Kerry Nelson says: “It is people with millions of pounds who have invested in VCTs because they are most effective for those in the 40 per cent tax bracket. But in these market conditions it is diffi-cult to try and attract just one type of investor.

“VCTs need to be more readily available to more people, which could be done by dropping some of the minimum requirements and making them less complex.”

Nelson believes VCTs should be aimed at people earning around £50,000 a year who have used up their Isa allowance but perhaps have an annual bonus to invest.

She says this would boost VCTs&#39 popularity and help them shed the snooty connotations that she believes have acted as a hindrance.

Only 30,000 people have invested in VCTs in the seven years they have been available. Around nine million people hold an Isa or a Pep. It is a discrepancy that fund managers are keen to address.

Octopus Asset Management is launching a VCT next month that will invest in UK smaller companies and is one manager that is trying to close the gap through a combination of edu-cation and marketing.

In a sector that has seen Matrix Money Management&#39s latest VCT, Cornerstone, struggle to raise anything close to £1m since launch more than a month ago, OAM&#39s Phoenix VCT is seeking £15m.

Fund manager Justin Jordan says: “The key is to offer a product that is tailored to the needs of clients of IFAs. If you can create a propo-sition that suits the market as it stands – as a smaller companies funds does at the moment – and market it extensively then I think you can do well.

“But the problem is that if you asked the average person on the street what VCTs are then most would not know or, if they did have some idea, they would probably say they are risky investments.”

To combat this, OAM is embarking on a countrywide marketing blitz designed to persuade hundreds of IFAs that Phoenix represents a solid – and reasonably safe – investment.

One of the angles it is taking is to highlight the changes it has made to improve the failings that IFAs have pinpointed about VCTs in their discussions. One of these relates to the poor decisions that some trusts have made in the past – several invested directly in technology stocks or split caps – and so Phoenix will invest in cash until investment opportunities arise.

Another problem that OAM has sought to address is a lack of liquidity, which Jordan says has forced investors needing to exit quickly to sell at a big discount.

But even with these refinements, Jordan admits that Phoenix&#39s success will hinge on OAM&#39s marketing campaign. He believes the reason that so few people have invested in them is principally because they have been under-marketed.

Phoenix will be competing with around nine or 10 VCTs for what Jordan believes will be roughly £100m in this tax year but of these only one other – Cornerstone – is a new offering. The rest are seeking additional funding.

For this reason, Yearsley believes Phoenix and Corner-stone may struggle to raise as much money as they are hoping, with wary investors sticking to what they know are the established VCTs.

He believes this will continue to be the case for as long as the stockmarket displays the kind of volatility that investors have seen.

Skilled and experienced operators are likely to remain in the market but potential entrants will perhaps decide that for £5m – widely seen as the critical mass required – launching a VCT is not worthwhile. As things stand, no one could blame them.

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